Articles from 2012

Frackopalypse Now

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Written by Nick Grealy

Published: 03 April 2012

Frackopalypse Now is how the WSJ describes it, but this is not the environmental catastrophe that some people fear and a few fracktivists secretly yearn for.That would be a large scale, if theoretically impossible environmental event, a shale Deepwater Horizon or Three Mile Island magically plugging the shale genie back in the bottle. Without that it's hard to create a mass movement of voters willing to replace hope over economic growth with an unhealthy obsession with cement casing logs.

Traders like to exude an "I've-seen-this-movie-before" air of nonchalance. But the thriller unfolding in natural-gas markets—call it "Frackopalypse Now"—has even the most jaded of them on the edge of their seats.

U.S. natural-gas prices are at a decade low, at about $2.20 a million British thermal units. That marks an unprecedented discount to crude oil. And next week heralds the start of "injection season," the time from April through October when warmer weather allows for rebuilding gas inventories.

This could make an already bad glut of gas far worse. The fear is that producers could be forced to actually give gas away.

Does this sound a like a shale Ponzi scheme? This is not shaping up as Art Berman intended for example,he who has been telling us all (and more pertinently UK DECC/OFGEM policy makers Poyry) that shale won't amount to much. Berman has been a consistent doomsayer who says that no one makes any money in shale and that most importantly the wells decline so rapidly that we actually run a risk of running out of gas.

I'm sure Art will say that we still do, but it won't be this year.This year is different. Some will try to blame it on the mild winter, while pretending that the 25% year or year fall in coal fired generation didnt' happen, but we've come to the end of winter when the storage tanks and caverns should be empty, traders are already on the precipice and peering into negative prices.

Owners of some U.S. natural gas storage sites began turning some customers away this week for fear that the system will overflow in autumn, the clearest sign yet that surging production may wreak havoc in the market later this year.

Huge supplies of shale gas from newly exploited deposits are set to fill U.S. storage caverns and tanks to their limit this year for the first time ever, threatening to force producers to shut down wells or risk overloading the pipeline network.

Injection restrictions are not common for this time of year.

"It is unusual to see capacity restrictions this early," an analyst at a major storage owner said. "We usually see those notices deeper into the summer."

Don't worry about traders too much. They hedge every possible contingency and mostly grasp some kind of gain out of the direst economics. Trader's aren't really on the precipice, it's some fractivists who will be on the window ledge as the economics of shale becoming ever more compelling.

The obvious long term solution is going to have to be creating demand. Powergen, NGV's, more chemical crackers and increased industrial demand won't be enough. Scary as this year looks, 13 and 14 won't be helped by even more gas coming on line.The only realistic hope for the North American gas markets is the introduction of LNG exports. Despite studies showing an impact of only 3 to 7% on US prices from exports, companies like Dow Chemical have been burned before by the natural gas commodity cycle and still can't quite get that this time it's different. As a result they have been calling for a ban on exports, but according to Bloomberg, wriggle room is developing over their opposition:

Dow Chemical Co. (DOW), the largest U.S. chemical maker, said domestic supplies of natural gas shouldn’t be exported “indiscriminately” because the industry is counting on continued low prices to justify factory investments.

“We are all nervous that we could get into a five-year project and the gas is all being exported and prices spike up,” Fitterling said in an interview. “Securing what is right for America and then exporting the balance makes sense.”

US LNG exports underline not only the insanity of not accessing European shale resources while buying theirs, but also highlight how the oil linked gas prices Vladimir Putin and Alistair Buchanan cherish as part of their shared mental furniture are surely a thing of the past.The Frackopalypse in North America today will eventually appear in Europe either via European shale or US shale/LNG. The story of shale is not only that the impossible happens: it happens stronger and sooner.